This is an opinion editorial by Mike Ermolaev, Head of Public Relations and Content at Kikimora Labs.
Setting the Background: Global Economic Fundamentals
The economy is still recovering from the COVID-19 outbreak as new problems emerge. We are now in a period of rampant inflation, and central banks are trying to compensate for this by raising interest rates.
The higher-than-expected (8.2% YoY) U.S. CPI data (Consumer Price Index) released on October 13 negatively impacted Bitcoin prices. But inflation isn’t the only problem, the global economy is also battling an energy crisis that is affecting Europe more than the US due to its strong reliance on Russian gas and raw materials.
In the east, the war in Ukraine and subsequent sanctions on Russia have further added to geopolitical instability and economic uncertainty. In addition, China’s zero-coronavirus policy is disrupting global supply chains, while Evergrande’s default has damaged one of the world’s largest economies.
If we look at the major currencies, the US dollar index looks strong compared to other currencies. The Federal Reserve raised interest rates by 75 basis points in November, and the Bank of England raised rates by the same amount. This quantitative tightening policy aims to reduce the money supply and ease price pressures. It will most likely continue into next year and beyond. However, global recession and stagflation risks remain high, so no country can feel safe with central bank monetary policy.
Bitcoin’s relevance to the economy
Bitcoin has proven to be immune to this global upheaval. While early prices were independent of traditional finance, correlations began to emerge in 2016.
The idea of Bitcoin as “digital gold” became popular because they both have scarcity and difficulty of extraction (mining), while also serving as a store of value. As many see Bitcoin as a risky asset, its correlation to the S&P 500 and Nasdaq 100 becomes apparent — not unlike traditional stocks.
At the time of writing, Bitcoin’s 40-day price correlation with gold hit 0.50 (after being close to zero in August). According to Bank of America strategists Alkesh Shah and Andrew Moss:
“The positive correlation with SPX/QQQ is decelerating and the correlation with XAU is rising rapidly, suggesting that investors may view Bitcoin as a relative safe haven as macro uncertainty persists and a market bottom remains to be seen. .”
There are some macroeconomic factors in the larger cryptocurrency ecosystem that have contributed to the bearish market: the Terra/LUNA crash, the forced liquidation of Three Arrows Capital and the bankruptcy of Celsius were the main factors.
The upcoming Bitcoin mining regulations in the European Union and the current crisis in Bitcoin mining profitability must also be taken into account.
Bitcoin: present and future
Despite all the aforementioned adverse events, Bitcoin has somehow been able to hold its price between $19,000 and $20,000 with record low volatility. Currently, we are observing an unusually stable Bitcoin price, which has even matched the volatility of the British pound recently.
Instead, stocks have experienced high volatility and price volatility following speculation about the Fed’s future decisions.according to Bloomberg Chief Commodity Strategist Mike McGlone, which is why Bitcoin could rise after a sharp discount and eventually beat the S&P 500. He believes that Bitcoin’s limited supply and deflationary approach may help it recover to previous price levels.
The price has been fairly stable since the last flash crash in mid-June, but we know it rarely sits still for too long. This means that the probability of a sudden (bullish or bearish) breakout increases over time. The longer the price sits idle, the stronger the breakout.
Additionally, BTC futures open interest is higher than ever, and liquidations are at an all-time low. A lot of liquidity is building up here, which means there will be a stronger push when prices start to fluctuate again.
According to strategist Benjamin Cowen, Bitcoin is expected to rise to “fair value” after a 15% drop. “Right now, the data suggests we’re about 50% undervalued compared to fair value.” Cowen believes we may have to wait until early 2024 to see this upward trend.
Goldman Sachs strategist Kamakshya Trivedi took a different view, claiming that the U.S. dollar index, which has shown record value since 2002, could be bad news for Bitcoin, which is currently bearish.
Bearish Scenario: Will the 2018 Drop Repeat?
Some analysts have been wondering if the 2018 scenario (low volatility followed by a big price drop) could happen again today as market conditions look very similar. We have the same 10% trading range and we know something will happen soon.
A notable difference between the two cycles is that 2018 saw an increase in addresses sending to spot exchanges, whereas in our current cycle we observed liquidity shifting from exchanges and not many new addresses were created . According to CryptoQuant analysts, this should mean we won’t see anything like 2018.
What about Uptober and Moonvember?
The fourth quarter has historically been a good time for Bitcoin, with a bullish trend starting in October and increasing in November. So October and November were colloquially renamed “Uptober” and “Moonvember” — at least, that’s what’s happening in 2021.
Can we expect so much optimism in the fourth quarter of 2022? It’s hard to say, but adverse macroeconomic conditions and geopolitical issues make it harder to imagine the same rebound we saw last year. After all, the Bitcoin market has fallen for 10 consecutive months, and we are not seeing any particular signs of recovery at the moment.
We must also remember that despite the adverse global situation, Bitcoin’s “safe haven” role may help give prices some extra strength, especially during these difficult times.
Exchange data analysis
The clearing data of the Bitfinex exchange is filbfilb analysis. He concluded that the momentum for a breakout to the upside will be less than that for a breakout downside. The fact that liquidity above $20,500 is mostly 10x, while below $18,000 is mostly 10x, 5x, and 3x, means that a bullish breakout will be “less brutal” than a bearish breakout.
We are currently witnessing a period of stagnation in the Bitcoin market. After two months of consolidation, Bitcoin prices need to start volatile again. The overall economic situation does not look promising, and Bitcoin is correlated with real-world events, but investors can still recognize the safe-haven role of digital gold, the most popular cryptocurrency. A strong Bitcoin price breakout is expected and fresh volatility is on the horizon.
Likely scenarios could be: a quick sell-off followed by a bullish recovery (V-shaped bounce) or a longer, deeper price crash after breaking the $19,000 resistance.
Whatever happens, Bitcoin will continue to be the most innovative technology of the past decade, enabling financial freedom and direct control over one’s wealth. Bitcoin has seen many intense bearish periods in its history and has always recovered from it.
This is a guest post by Mike Ermolaev. The views expressed are entirely their own and do not necessarily reflect the views of BTC Inc. or Bitcoin Magazine.